Defending the Micron/Elpida Merger (MU)

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Micron Technology Inc. (NASDAQ: MU) has seen a very muted reaction to its efforts to buy Elpida out of bankruptcy. Stern Agee has keyed in and reiterated a Buy rating and an $11.00 price target.  That is a call for about 68% upside.  Here is the logic:

Analyst Vijay Rakesh noted, “1) Muted reaction pending more clarity on the final amount that MU will pay, and 2) Based on that if MU needs to come to market for any additional financing. Nonetheless we would be buyers with MU paying only 30-35c or less per dollar for the deal… We believe some of the muted reaction is because of no Official comments thus far and investors waiting to see how much the deals ends up to be.”

Whether the deal comes to $2 billion or $2.5 billion, Stern Agee’s note is talking up the Hiroshima fabrication plant with 120,000 wafers per month of 30nm/300mm manufacturing and 64% ownership in the Rexchip fab, as well as the Akito Elpida Back end Packaging and 3 to 4 design centers.  The assets were carried on Elpida’s books at about $7 billion but the firm’s take is that the assets with Elpida’s Memory intellectual property is worth more than $7 billion.  If so, then Micron is paying thirty to thirty-five cents on the dollar or even less if the deal includes future Potential Capex for Elpida.

Stern Agee concludes, “Given the pace of negotiations, we believe the deal should be accretive L-T and drive consolidation, price stability and profitability in the DRAM marketplace.”

Micron shares are trading up $0.03 at $6.53 on first look and the 52-week trading range is $3.97 to $10.93.